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MND NewsWire features plain and simple interpretations of industry related data and events written in a manner that maintains the interest of random readers while still catering to the perspective of a housing market professional.

Edward
J. DeMarco, Acting Director of the Federal Housing Finance Agency, told members
of SIFMA this afternoon that "The secondary mortgage market infrastructure that served this country for many years
is broken." It is not effective
when it comes to adapting to market changes, issuing securities that attract
private capital, aggregating data, or lowering barriers to market entry he
said. There must be some updating and
continued maintenance of the government sponsored enterprises securitization
infrastructure, "and to the extent possible, we should invest taxpayers'
dollars to this end once, not twice."

He told SIFMA members that, as
those who invest in the secondary market, they are uniquely positioned to contribute to policy discussions about
the future of the housing finance system. There are many views and many important
issues about access to credit and fair treatment
for
borrowers,
and fostering a competitive
primary and secondary mortgage market.
But if we really are serious
about expanding
the private sector's role in housing finance, we must consider what
types of
changes are necessary to bring private capital
back to the housing finance market.

The
conservatorships of Fannie Mae and Freddie Mac were never intended to be
long-term solutions. They were meant as
a "time-out" as the market was eroding and a way to provide some stability
while decisions were made about rebuilding the housing finance system. Today the government is involved in nine out
of every ten mortgages so it is essential that the mortgage market transition
to a more secure, sustainable, and competitive market.

DeMarco
said that the country's regulatory infrastructure sets and enforces certain
rules of the road; in part to ensure that fraud or poor business decisions
don't create spillover costs for the system but also to add certainty and
transparency; protect customers and promote access to credit. But the owners of private capital must make
informed decisions about the allocation of resources to promote economic growth
and prosperity.

"In the mortgage market, that means
we
need established rules by which everyone abides.
But we also need competitive markets and
market participants
operating within
those rules to ensure that credit is
available to
help families purchase homes
and rent houses and
apartments.
A competitive
private market
system
also ensures that such
capital is efficiently allocated
between housing and
all other sectors."

Regardless of how the
conservatorships are resolved, the Acting Director said, we know the nation
will need a healthy and efficient secondary market and FHFA has set out to
develop a framework that will serve the GSEs in the short term and have broad
application in the future.

FHFA recently issued a white
paper in which the development of a new infrastructure was divided into two
components; the "physical" infrastructure or platform which comprises the
technology that drives the existing secondary market operations and the
"virtual" infrastructure, meaning the contractual provisions that govern
secondary market transactions.

The Enterprises' outmoded
proprietary infrastructures need to be
updated and maintained, DeMarco said, and any such update should
provide enhanced value to the mortgage market with
a common
and more efficient model. FHFA has undertaken this effort with
the goal that it will
have benefits beyond
the GSE business model. Therefore, this new infrastructure must
be operable across many platforms,
so that it can be used by any issuer, servicer, agent,
or other party that decides to participate.

In the
white paper FHFA raised the issue of the platform's scope. The focus could
be on functions that
are
routinely repeated across
the secondary mortgage market, such
as issuing securities,
providing disclosures, paying investors, and disseminating data. Each is a function where standardization could
have
clear benefits to market participants. For example,
if there is to be some type of federal guarantor of mortgage-backed securities,
that guarantor will need
these functions performed.
Private-label
mortgage-backed securities market
might also benefit from
such a utility. Providing standardization across
key
mortgage market functions
should add depth and liquidity to
the market.

The second component of
the securitization infrastructure -
the contractual framework - is governed in the current securitization model
by
the GSEs' Selling and
Servicing Guides. These
set forth the rules that
sellers must follow to obtain the GSE guarantee
and the rules for servicing mortgages, including the
procedures
that must be followed to address delinquent
loan servicing.

The equivalent in the private-label securitization market is the
Pooling and Servicing Agreement
or
PSA, a legal
document that lays out the responsibilities and rights of
the servicer, the trustee, and
others
over a pool
of mortgage loans. While the PSA covers some of the same issues
as the Guides, there has been more variation in the individual agreements. Variation in terms can lead
to tailoring of transactions to meet particular investor requirements, but greater standardization in some areas could add
more liquidity and
more certainty to
the market. In
addition, as became evident
during the financial crisis,
the responsibilities of various parties in the
PSA agreements
may
have made resolution of issues more difficult and added to the
losses of many investors.

While the
GSE's are working toward harmonizing
requirements in their respective Seller and
Servicing Guides,
this is an optimal time
to further consider how best
to address contractual
shortcomings identified during the past few years.

Some of the work already underway
which will fit into the various parts of a new infrastructure for housing
finance are:

The
Uniform Mortgage Data Program is improving the consistency, quality and
uniformity of data gathered at origination and for servicing. Common data definitions, electronic data
capture, and standardized data protocols will improve efficiency, lower costs,
and enhance risk monitoring.

Settling
on servicing standards will provide clarity on how troubled loans will be
serviced and FHFA's Servicing Alignment Initiation produced a single set of
protocols for both GSEs which may serve as a basis for national servicing
standards.

The
Representation and Warranties framework long used by the GSEs did not work well
under stress conditions so the GSEs have developed a new framework that will
clarify lenders repurchase exposure and liability on deliveries after January
1.

The
Loan-Level Disclosures announced last year will help establish consistency and
quality of data for investors in Enterprise MBS.

DeMarco said that there is no
simple path to rebuilding the country's housing finance system and there are still many fundamental
questions about the end state of housing finance reform. There are also
difficult transition issues to consider and FHFA is working to help pave that
transition to whatever end state policymakers ultimately
choose.

One step is to contract the GSE
operations. To that end, FHFA is
increasing guarantee fees and pursuing initiatives with the potential to transfer some credit
risk to the private sector, a goal that
most policymakers
seem
to agree with. While FHFA will continue to work in this area, if policymakers
are serious
about limiting the government's role, more
direct action may be needed
to have significant near-term effects.

The most fundamental question in considering the end
game for housing finance reform is what, and how
big, should the role of the
federal government be? This,
DeMarco said, is clearly where there are diverging policy and political
views, but stakeholders must start to think through this process. Perhaps it will be easier to
break
this question up into component
parts, not to suggest a particular legislative strategy, but rather a defined ordering of how to
think about housing finance reform.

One
potential place to start is what the role of the traditional government mortgage guarantee programs,
like the Federal Housing Administration or
FHA, should be.
If FHA's role in the future is defined in terms of which
borrowers would
have access
to this program,
then it should be easier to look at
the rest of the market
and consider questions like:

"What is the
capability and
capacity of private market
participants to intermediate credit for single-family housing? What
functions
are
necessary to have an
efficient market?"

"How should standards be established
and updated in the market
to enhance efficiency,
risk assessments, and
liquidity, thereby lowering
costs to borrowers and
investors alike?"

"Where do
we
think the market system
requires prudential
government
oversight or
limits? Have we ensured
that any oversight
or
limits act to foster,
not inhibit, competition, including fostering the full participation
of small and mid-sized firms in the mortgage
market?"

"Are there remaining public policy concerns about potential market failures
and, if so, are those concerns
about market stability and liquidity or about social policy goals regarding
homeownership?"

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